SCO Pushed to a Loss in Q3 as Unix Sales Slip

by Timothy Prickett Morgan

Unix operating system software provider The SCO Group continues to have difficulty pushing its products in the face of heated competition from Linux suppliers and Microsoft with its Windows alternative on X86 and X64 iron. SCO has turned in a pretty rough third fiscal quarter ended July 31, which is probably attributable in part to the roll out of its "Legend" OpenServer 6 variant of Unix at the end of June.

SCO said that overall revenues in the third quarter of fiscal 2005 were $9.35 million, down 16.5 percent from the $11.21 million in sales the company posted in the same quarter last year. SCO attributed the decline to pressure on its core Unix operating system business, which has been the company's song and dance for the past several years. All Unix platforms are having trouble competing against Wintel and Lintel platforms, and even if SCO was the dominant supplier of Unix-on-Intel operating systems for many years (and in many different corporate incarnations, I might add), that does not mean it is somehow immune from the effects of that competition. So in this regard, SCO is not just glossing over the situation or wrongly attributing its financial woes. Having said that, the long-running lawsuits with IBM, Red Hat, Novell, and two customers concerning Unix licensing and Unix intellectual property have been a drain on SCO and have given it a bad name in some IT circles. More than anything else, the rapidly improving Linux operating system is perhaps the biggest threat. In many ways, the Linux 2.6 feature set has surpassed the Unix System V Release 5 feature set that is at the heart of OpenServer 6.

To its credit, SCO has delivered OpenServer 6, pumped up its channels, and tried to shift the conversation away from the lawsuits and toward the improvements it has made in the products. And because OpenServer 6 was only shipped for a few weeks in the quarter, the third quarter may not be an accurate indicator of how SCO's Unix business is really doing. Its fiscal fourth quarter might be, however. All that anyone can say for sure is that it is a long time before February 2007, when the SCO-IBM lawsuit finally goes to trial and when we can finally begin to see if SCO's gambit will pay off big.

SCO did say that, despite the revenue decline, its Unix software business was profitable even though its overall business posted a net loss of $2.37 million in the quarter, or about 13 cents a share. This time last year, SCO had a net income of $7.5 million, or about 49 cents a share. Unix operating system sales were just under $8 million, compared to $8.9 million in sales in the third quarter of fiscal 2004. That's only a drop of 10 percent. Intellectual property and services sales were off in the quarter, with only $32,000 in Unix IP sales compared to $678,000 this time last year. Services sales were $1.37 million, down 14.3 percent.

For the nine months of fiscal 2005, SCO has posted sales of $27.5 million, down 16 percent. Believe it or not, its losses are diminishing over time, too. For the nine months ended July 31, SCO had a loss of $7.3 million, compared to a loss of $16.8 million for the first nine months in fiscal 2005. SCO said that its Unix business has been profitable for all of those three quarters, too.

SCO has to pay its lawyers another $4 million and it is done with making payments; Boies, Schiller & Flexner will get a slice of any awards that SCO gets in the lawsuits, but no more cash from SCO. SCO paid $3.1 million in legal costs in the third quarter. SCO had $8.6 million in cash and equivalents at the end of the quarter, up a tiny bit from the prior quarter. It also has $4 million in an escrow account to pay those legal fees, so those costs are already covered. Say what you will, but SCO is negotiating some very tough legal and financial waters pretty deftly. Now, it needs to get actually profitable--and do so long before the IBM case is decided.